Currency Futures And Option Market

Currency futures are standardized contracts that trade like conventional commodity futures on the floor of a futures exchange orders to buy or sell a fixed amount of foreign currency are received by brokers or exchange members.  These orders, from companies, individuals, and even market-making commercial banks are communicated to the floor of the futures exchange. At the exchange, orders to buy a currency - long positions - are matched with orders to sell – short positions.  The exchange, or more precisely, its clearing corporation, guarantees both sides of each two-sided contract, that is, the contract to buy and the contract to sell.  The willingness to buy versus the willingness to sell moves future prices ups and downs to maintain a balance between the numbers of buy and sell order.  The market-clearing price is reached in the vibrant, somewhat chaotic appearing trading pit of the future exchange.  Currency futures began trading in the International Money Market (IMM) of the Chicago Mercantile Exchange (CME) in 1972. 

Forward exchange and currency futures contracts must be exercised.  It is true that currency futures can be sold and margin balances can be withdrawn.  It is also true that forward contract can be offset by a second contract that is the reverse of the original contract.  However, all forward contracts and currency futures must be honored by both parties, that is, the banks and their counterparties, or those holding outstanding future, must settle.  There is no option allowing a party to settle only if it is to that party’s advantage.  Unlike forward and future contracts, currency options give the buyer.  The opportunity, but not the obligation to buy or sell at a pre-agreed price – the strike price or exercise price in the future, that is, as the name suggests, the buyer of an option contract purchases the option or right to trade at the rate or price stated in the contract if this is to the option buyer’s advantage, but to allowed option to expire unexercised if that would be better